Market Risk Management Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Market Risk Management flashcards as text
Expected Shortfall (ES), also called CVaR, is superior to VaR because it:
Answer: Satisfies all four properties of a coherent risk measure, unlike VaR
ES is a coherent risk measure satisfying subadditivity, monotonicity, positive homogeneity, and translation invariance—properties VaR violates.
What is basis risk in hedging?
Answer: The residual risk when the hedging instrument does not perfectly offset the exposure being hedged
Basis risk arises because the price of the hedging instrument may not move in perfect correlation with the exposure, leaving residual risk.
In scenario analysis for market risk, a 'reverse stress test' involves:
Answer: Starting with a catastrophic outcome and identifying scenarios that could cause it
Reverse stress tests work backward from a near-failure outcome to identify plausible market scenarios that could cause such losses.
Which of the following is an example of specific (idiosyncratic) market risk?
Answer: A single company's stock dropping due to an earnings miss
Idiosyncratic risk is unique to a specific company or security and can be reduced through diversification, unlike systematic market risk.
The 'Greeks' measure vega as:
Answer: Sensitivity of option price to changes in implied volatility
Vega measures how much an option's price changes for each 1% point change in implied volatility.
What is 'jump risk' in equity market risk management?
Answer: Sudden, discontinuous price movements that cannot be hedged with delta alone
Jump risk refers to sudden, large discontinuous price moves in equity markets that delta-hedged portfolios cannot offset in time.
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